This is the busiest week of the year for the central banks that matter most to your transfers. The European Central Bank already raised its rate last Thursday. Now the US Federal Reserve decides on Wednesday, and the Bank of England follows on Thursday, with UK inflation figures landing in between. Three major decisions inside eight days is unusual, and together they will shape the pound, the euro and the dollar for months to come. Below, we look at what’s already happened, what’s still to come, and what it could mean for your transfers.
Latest market insights:
Pound to euro: a narrowing gap, and a finely balanced Bank of England
- Sterling has been little changed against the euro over the past couple of weeks, holding close to recent levels even as the backdrop shifted underneath it. The main story is the European Central Bank, which raised its deposit rate from 2.25% to 2.50% last Thursday, its second increase since the Iran war began. President Christine Lagarde described the decision as unanimous and called it straightforward, pointing to euro area inflation of 3.3% in August, driven largely by a sharp rise in energy costs.
- That move narrows the interest rate gap between the UK and the eurozone that has supported sterling against the euro for much of this year. It doesn’t close it: even after the ECB’s move, UK rates still sit well above eurozone rates. But a narrowing gap, if it continues, would generally work against one of the main supports sterling has enjoyed.
- On the UK side, the picture is more finely balanced. The Bank of England is still widely expected to hold its rate at 3.75% on Thursday, with markets pricing only around a one in five chance of a rise. But the case for a hold weakened slightly last week: UK economic growth for July came in at 0.4% for the month, ahead of forecasts, and the Bank’s governor, Andrew Bailey, has pushed back publicly against the idea that another rate rise is off the table, saying future decisions would depend on how the data develops. UK inflation figures for August are due on Wednesday morning, the day before the Bank’s decision, and will be the last significant piece of evidence policymakers see before they vote.
- For anyone buying a property in Europe, a 1% move against you on a €400,000 purchase would mean finding an extra £3,400, that is a significant sum to have to find at short notice. This is exactly the kind of situation our currency specialists help clients plan for. Rather than trying to guess which way the market will move, you can fix your exchange rate in advance for a future transfer date through a forward contract, or set a target rate you agree with through a rate order, so that you know in advance what you will need to budget for. There may be a deposit requirement for some of these arrangements. Our team can talk you through how each option works and whether it suits your situation. Call us on +44 (0)204 506 5672.
US dollar to euro: markets brace for the Fed’s next move
- The dollar has been underpinned by a run of stronger than expected US data over the past fortnight. Hiring jumped by 162,000 in August, far above the roughly 55,000 economists had pencilled in, while the unemployment rate held steady at 4.1%. Inflation figures released last week told a more mixed story: the headline rate held at 3.4%, but the core measure, which strips out food and energy, cooled to its lowest annual pace in over five years, even as prices rose more quickly than expected on the month, largely because of higher petrol costs.
- Combined with a notably firm message from Fed Chair Kevin Warsh in his first major speech last month, this run of data has pushed market expectations firmly towards a rate rise on Wednesday, which would be the first of his time as chair. It’s a significant moment: a new Fed chair’s first rate move tends to be read closely for what it signals about his approach going forward, beyond the immediate decision itself.
- Oil prices have added a further complication. Brent crude has climbed back above $100 a barrel as the blockade of the Strait of Hormuz continues, with Iran saying the waterway will not reopen until its conditions are met, even as diplomatic talks involving Gulf states have offered some hope of a resolution. Higher oil prices raise inflation on both sides of the Atlantic, adding to the pressure on the Federal Reserve and, as discussed above, having already featured in the European Central Bank’s own reasoning last week.
Pound to US dollar: caught between two decisions
- Sterling has held broadly steady against the dollar over the past month, down by less than 0.1%, as stronger UK data has offset some of the dollar’s own underlying strength. That calm is unlikely to last through this week. With the Federal Reserve deciding on Wednesday and the Bank of England following just a day later on Thursday, this pair is positioned to see some of its sharpest moves of the year.
- The most straightforward scenario, a US rate rise alongside a Bank of England hold, would likely push the dollar higher against sterling, extending the pattern seen through most of this year. But either decision could easily surprise: a hold from the Federal Reserve, or a hike from the Bank of England, would each work in the opposite direction. As ever, this isn’t something that can be predicted with certainty, which is exactly why planning ahead matters more than trying to time the market.
What to watch this week:
Wednesday 16 September:
- UK inflation figures for August, released in the morning. In the afternoon, the US Federal Reserve announces its rate decision, the first of Fed Chair Kevin Warsh’s time in the role. A rise is widely expected.
Thursday 17 September:
- Bank of England rate decision. A hold at 3.75% is the widely expected outcome, with markets pricing only a minority chance of a rise.
If you have an international transfer coming up in the next few weeks or months, for a property purchase, a pension payment, supporting family abroad, or any other reason, the events of this week are a useful reminder that exchange rates can move quickly, and not always in the direction you’d hope.
The good news is that you don’t have to simply wait and see what happens. Speaking with a currency specialist costs nothing and carries no obligation. They can talk you through your options, including spot contracts for transfers you need to make now, and forward contracts for transfers you’re planning further ahead, and help you understand how today’s rate movements might affect your specific situation.
Contact Lumon on +44 (0)204 506 5672 for a free, no-obligation conversation and discover what options you have available to help.
